Companies (Audit, Investigations and Community Enterprise) Bill [HL]

Part of the debate – in the House of Lords at 12:40 pm on 8th January 2004.

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Photo of Lord Phillips of Sudbury Lord Phillips of Sudbury Liberal Democrat 12:40 pm, 8th January 2004

My Lords, I am grateful to the Minister who, in opening this debate, paid tribute to Roger Warren Evans and Stephen Lloyd for having invented the concept of the community interest company, the CIC. The Bill before us follows substantially the skeleton form that they produced three years ago. It is not often that we are in the business of creating a new corporate vehicle and I think this could be the first entirely new corporate category since the 19th century.

So fascinating is the Bill that over the past 24 hours I have managed to miss one train and, on two other occasions, travelled past my intended station—including this morning. It is a riveting read. And a period of around seven minutes is not long enough to cover all I want to say at this stage of our consideration. I suspect that the noble Baroness, Lady Thornton, and myself may be the only speakers to address Part 2, covering community interest companies.

Before turning to my main points, I want to say briefly that I believe that there should be a greater entitlement to information for members of such companies than is the case for normal companies, and that we should provide for that. Further, we should consider providing for a more open membership of such companies than is the case for traditional business entities. Again, no provision has been made for that. I should also be grateful if the Minister would consider making gifts from one CIC to another exempt from stamp duty because on distribution following a winding-up, surplus assets will have to be sent to another CIC or a charity rather than put in the pockets of the members. Will the Minister consider allowing capped interest paid by CICs to be treated as pre-tax charges, as is the case for industrial and provident societies? Finally, could capped dividends enjoy the same tax relief as that allowed under enterprise investment relief schemes?

The first and most important point I want to consider relates to the whole principle of preventing a CIC also being a charity. Clause 23(3) states that:

"A community interest company established for charitable purposes . . . is to be treated as not being a charity".

Complicated provisions set out in Clauses 36, 37, 51 and 52 deal with this confusion—this paradox, as I see it—together taking up some three-and-a-half pages of text. This is the first time in English history that a body established for exclusively charitable purposes, with a constitution entirely in accordance with the requirements of charity law and which operates exclusively as a charity, is to be prohibited from registering as such.

The existing law has always been simple. Whatever the form of the charity, the factor which determines whether it is or is not one is the substance—its activity and purposes. That is why in this country we have a wider range of charitable options than any other in the world, and it is why the other Anglo-Saxon jurisdictions have followed us. That is in stark contrast to the Napoleonic code countries where entitlement or status follows form. The freedom that this has given the charitable sector in this country, along with the unique protection afforded to the public, will be subverted if the clause is passed.

I think I understand the reasoning: I suspect that there is a desire to prevent what might be seen as confusion in the public mind over the nature of a CIC. However, I urge Ministers to look at this again, no matter how attractive that argument may be at first blush. If the prohibition stands then let us make no mistake: we will then have the bizarre state of affairs whereby the type of company most distant from that which the public conceives of as a "charity"—namely, a typical company limited by shares, which is the standard vehicle for a private benefit business—will continue to be permissible as a vehicle for charity, while a CIC—expressly a community interest entity with controls on the distribution of its assets—cannot be used as a vehicle for a charity. That is extremely confusing.

What is more, we may get into an "Alice in Wonderland" situation whereby a CIC with charitable purposes—that is admitted as a prospect in Clause 23—will not be able to be a charity, but none the less will be able to blazon abroad as much as it likes the fact that it has charitable purposes. I put it to noble Lords that that is daft.

Furthermore, if CICs are allowed to be charities, as are all other forms of company, trusts or unincorporated associations, they will also have to comply with charity law. They will not be able to pay directors and they will be subject to many other provisions that will inhibit their freedom of action.

Not only do I see no downside to continuing with the age-old system vis-a-vis charities, but there is a huge advantage in it. In time, I believe the CIC will prove to be a more popular vehicle for corporate charities than any of the existing forms, given the ethical match between a CIC and a charity. It should also considerably shorten and simplify this Bill. A number of noble Lords have already referred to its length and complexity.

My second main point concerns the absence from the protection provisions in the Bill of any control over remuneration. Part of the Government's case set out in paragraph 159 of the Explanatory Notes declares that they want to provide the public with,

"a clear assurance of non-profit-distribution status".

To allow the unlimited remuneration of the directors or employees of CICs would be to drive a coach and horses through any attempt at controlling the distribution of the assets of a CIC. That is because Clauses 27, 28 and 29 as drafted only inhibit levels of dividend payments and interest payments. They also control the distribution of assets on a winding-up, but they do nothing at all to constrain the remuneration, level of bonus payments or salaries of members of a CIC board. I urge the Government to deal with that.

Perhaps I may refer briefly to the discretionary power given to the regulator under the terms of Clause 27(3)(b) to,

"set different limits for different cases", by which it means that the regulator will be able to say, "I am going to allow this particular CIC a capped interest rate of 10 per cent", while all other CICs are being allowed to pay only up to 5 per cent. Alternatively, he could consider different categories of CICs and put limits above and below the norm on the distribution of dividends and interest. That would be a first in English law and I see no reason at all why either the regulator or the Secretary of State should have such a power. What are his or her qualifications, and why should the state be able to favour one kind of activity over another? That is as invidious as it would be to allow the Registrar of Companies to set differential corporation tax rates between one type of business and another. I urge the Minister to review this point.

I want to toss out the thought that the regulator should be subservient to and part of the registry of company arrangements. Nothing in the Bill makes it necessary to create another free-standing bureaucracy. The Registrar of Companies has a good reputation and I believe that significant administrative and cost savings could be made if the Bill is reconsidered so that much, if not all, of the bureaucracy could be put into the companies registry.

Finally, I want to refer briefly to the definition of a "community interest company". I wonder whether we need to have one at all. The definition proposed in Clause 32(2) is astonishingly wide—indeed, the whole Bill needs to be looked at because so much is expressed in bland and widespread terms; namely:

"A company satisfies the community interest test if a reasonable person might consider that its activities are being carried on for the benefit of the community".

That is very helpful! But since many of these companies will be new and will not have undertaken any activities—they will have merely a constitution—and in particular since this should concern not simply the type of business being conducted but the manner in which that is done, I suggest that we could do without such a definition.

Of one thing we can be sure: no one seeking to line their pockets will set out on the road of business or enterprise in the form of a CIC, because of the controls on dividends and interest and, I suggest, remuneration. Again, this would save a whole lot of hassle, bureaucracy, frustration and expense. What is wrong with that?